India's CBDT identifies Cyprus as Notified Jurisdictional Area

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Executive summary

India's Central Board of Direct Taxes (CBDT), the apex Indian Tax Administrative body, recently issued a Press Release dated 1 November 2013 (Press release), identifying Cyprus as a Notified Jurisdictional Area (NJA) under the provisions of the Indian Tax Laws (ITL)1 which seek to strengthen the Indian system of collection of information from foreign tax jurisdictions.

The ITL contains a “tool box” to deal with transactions with entities located in non-cooperative countries or jurisdictions which do not exchange information with India. The Government of India (GOI) is empowered to identify such jurisdictions as an NJA to discourage transactions by taxpayers in India with persons located in an NJA by providing for onerous tax consequences with respect to such transactions. Since Cyprus has not been providing the information requested by the Indian Tax Authority under the exchange of information (EOI) provisions of the India-Cyprus Double Taxation Avoidance Agreement (treaty), the same has been identified as an NJA.

Background

Lack of an effective EOI is one of the key contributors to the proliferation of harmful tax practices. Most of India's comprehensive treaties have an EOI article. However, there was less incentive for certain jurisdictions with negligible tax rates, popularly known as “tax havens,” to have a comprehensive treaty with India. Accordingly, the GOI is empowered to enter into Tax Information Exchange Agreements (TIEAs) with such jurisdictions.

The ITL authorizes the GOI to identify a country or territory as an NJA if there is no effective mechanism for EOI. This is envisaged to discourage transactions by a “resident” taxpayer (Taxpayer) with persons located in an NJA. Further, the phrase “person located in an NJA” is defined to include (a) a person who is resident of an NJA or (b) a person not being an individual and which is established in an NJA or (c) a permanent establishment in an NJA of any person.

Recently, the CBDT, via Notification No. 47/2013 dated 26 June 2013, prescribed rules and forms for furnishing of authorization and maintenance of documents by the Taxpayer who has entered into a transaction with persons located in NJAs. The above notification enlists (a) requisite documents to be maintained by the Taxpayer who has entered into a transaction with a person located in an NJA, (b) format of authorization to be given to the CBDT to access the Taxpayer's information with financial institution in an NJA, and (c) the time period until which the information is to be maintained and furnished.

The Press Release

India and Cyprus entered into a treaty which has been in force since 1994. Pursuant to the treaty, both the countries have an obligation to exchange information as is necessary, particularly for prevention of fraud or evasion of taxes.

The Press Release states that Cyprus has not been providing the information requested by the Indian Tax Authority under the EOI provisions of the treaty. Accordingly, the GOI has identified Cyprus as an NJA under the ITL.

Presently, the date of applicability of the Notification is not given in the Press Release.

The consequences of identifying Cyprus as an NJA are as follows:

• Any transaction between an Indian resident and a Cyprus located entity (CLE) will be deemed to be an “international transaction” and all parties to such international transaction will be treated as “associated enterprises.” Accordingly, such transaction will be subject to transfer pricing regulations (TPR) in India and all compliance requirements, including maintenance of documents under TPR, would become applicable.

• No deduction for payments made to any financial institution in Cyprus will be allowed unless the Indian resident furnishes an authorization to the Indian Tax Authority to seek necessary information from such financial institution.

• No deduction will be allowed for any expenditure/allowance (including depreciation) arising from such transactions, unless the Indian resident maintains such documentation and furnishes such information as may be prescribed by the CBDT.

• Any sum received by the Indian Resident from a CLE will be deemed to be the income of such Indian resident, unless it “satisfactorily” explains the source of such money in the hands of the CLE or the beneficial owner of such income.

• Rate of withholding tax for any payment made to a person located in Cyprus shall be 30% or a rate prescribed under the ITL, whichever is higher.

Implications

Lately, international tax evasion, the implementation of high standards of transparency and EOI has been the focus of the political agenda of global economies, including India. India secured membership with the Financial Action Task Force (FATF) in 2010. This was an important initiative of the G-20 for anti-money laundering. India has also joined the task force on Financial Integrity and Economic Development, Eurasian Group (EAG) and Global Forum on Transparency and Exchange of Information for tax purposes. To effectively handle the increase in tax information exchange and transfer pricing issues, the foreign tax division of the CBDT has been strengthened.

The identification of an NJA is consistent with the global trend of introducing counter measures to deal with “non-cooperative tax jurisdictions” and strengthen tax enforcement. To illustrate, Colombia's Ministry of Finance identified certain jurisdictions (including Cyprus and Mauritius) as tax havens, mandating taxpayers dealing with such jurisdictions to comply with onerous procedural provisions along the lines of the ITL. Cyprus has been the first jurisdiction identified as an NJA in India under the ITL.

Taxpayers dealing with persons located in Cyprus need to review the impact of this administrative move on their transactions/business structures and comply with various procedural requirements specified in the rules. Non-compliance with the procedural requirements may entail onerous consequences.

Endnote

1. As stated in the Press Release, Cyprus is identified as an NJA vide Notification No 86/2013 dated 1 November 2013 (Notification). However, the official copy of the Notification is yet to be released in public domain.

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